1. MAJMUDAR, J.-In this reference, the Income-tax Appellate Tribunal, Ahmedabad, Bench 'B' has referred for our opinion a question of law under section 256(1) of the I. T. Act, 1961, at the instance of the assessee. The question runs as under : "Whether, on the facts of the case, the Tribunal was right in law in holding that the assessee was not entitled to deduction of the interest payments of Rs. 20,435, Rs. 54,632, Rs. 50,025 and Rs. 5,497 for the assessm ent years 1966-67 to 1969-70, respectively?"
2. The assessee's father expired somewhere in July, 1965. On his death, the assessee inherited assets worth Rs. 12,38,000 and liabilities worth Rs. 2.47,000 in respect of the borrowing from the Bank of India by the assessee's father. The Bank liabilities represented overdraft taken by the assessee's father for the purpose of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares had been pledged by the father of the assessee with the Bank of India as security for the overdrafts for the relevant assessm ent years 1966-67, 1967-68, 1968-69 and 1969-70. The I.-T. O. Did not allow the claim of the assessee to deduction of interest payment to the Bank of India from the income from assets inherited by him on the death of his father. The assessee's case before the 1,-T.
3. O. Was that when the revenue was assessing the dividends from such shares which he had inherited from his father and when it was also assessing the rental income of the assessee from the property inherited by him, as a necessary corollary the assessee should be allowed a deduction of interest payment made by him on such liabilities. The I.-T. O. Took the view that the assessee was not able to prove that the interest payment was for the purpose of investment, income from which was chargeable to tax.
4. Being aggrieved by the said order of the I.-T. O. The assessee went in appeal to the A. A. C. The A. A.
5. C. Observed that the interest deduction which was claimed by the assessee pertained to the amount of interest which was paid to the Bank of India towards the overdrafts taken by his father in order to pay taxes and, such being the case, interest on such overdrafts was not a permissible deduction. The A. A. C. Observed that even if the assessee had himself borrowed loans in order to pay taxes, the interest on such borrowings would not be eligible for deduction from the assessable income.
6. The A. A. C's. Orders were challenged before the Income-tax Appellate Tribunal where the assessee contended that what the assessee inherited were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited as a deduction from the assessable income because what was assessable must be the real and not the fictional income. It was also submitted that what was true of the wealth or the estate must also be true of the income and it cannot even be suggested by the revenue that the liabilities inherited by the assessee were not deductible front the wealth or the estate.
7. The assessee submitted before the Tribunal that his father had expired on July 7, 1965. On his death, the assessee inherited gross book value assets worth Rs. 12.38 lakhs and liabilities worth Rs.
8. 2.47 lakhs in respect of the borrowings from the Bank of India by the assessee's father. The Bank liabilities represented overdrafts taken by the assessee's father for the purpose of paying his tax liabilities. The assessee's father in his lifetime had paid interest on the overdrafts for four years. Out of the assets which included shares and buildings, the shares bad been pledged with the Bank of India as security for the overdrafts. The assessee con--tended that when the revenue was assessing the dividends from such shares and the rental income from properties inherited, as a necessary corollary the assessee should be allowed a deduction of the interest payment on such liabilities.
9. The Tribunal repelled the aforesaid contention of the assessee and held that the decision of this Court in the case of C. I. T. v. Mrs. Indumati Ratanlal
(1) directly applied to the facts of the case. The Tribunal also placed reliance on the decision of this Court in the case of Padmavati Jaykrishna v. C. I. T. ((1975) 101I. T. R 153) The Tribunal held that the assessee was not entitled to a deduction of interest payments of Rs.20,435, Rs. 54,632, Rs. 50,025 and Rs.5,497 for the assessm ent years 1966-67, 1967-68, 1968-69 and 1969-70 respectively, as claimed by the assessee.
10. As stated above, the assessee thereafter moved the Tribunal for referring the question of law which has arisen from the Tribunal's common order in I. T. As. Nos. 506 to 509 (Ahd) of 1973-74 and thereupon the Tribunal has referred a common question for our decision under section 256 (1) of the I. T. Act. We have already extracted the said question in the earlier part of this judgment.
11. Mr. J. P. Shah, the learned Advocate appearing for the assessee, con--tended that what the assessee inherited from his father were encumbered properties and, therefore, there could be no justification for disallowing the interest payment on the liabilities inherited from the assessable income because what is assessable must be the real and not the fictional income. Mr. Shah submitted that on the principle of real income received by the assessee it ought to have been held that the interest amount paid by the assessee during the relevant assessment years to the Bank of India did not represent his own income, but represented amounts which were diverted for payment for meeting the claims of a secured creditor, namely, the Bank of India, on account of the overriding title inhering in favour of the said creditor. Consequently, the amounts of interest which were paid during the relevant years by the assessee by way of interest on overdrafts to the Bank of Indiawere required to be deducted from the gross receipt for computing the real income accruing to the assessee during the relevant assessment years. Mr. Shah alternatively submitted that even assuming that these amounts of interest (to form par: and parcel of the income of the assessee accruing to him during each of the concerned assessment years, even then the said amounts were deductible under section 57 (iii) as a permissible deduction on the ground that they represented expenditure laid out or expended wholly and exclusively for the purpose of earning the dividend income from the shares which were pledged with the Bank of India by the deceased father of the assessee for securing the overdraft facility which was granted by the bank of India during the relevant years.
12. Mr. Raval, the learned Advocate appearing for the revenue, on the other band contended that the lower authorities bad taken the correct view of the legal position when they turned down the disputed claim of the assessee.
13. The assessee's father who was the original assessee died on July 7, 1965. On his death, the assessee inherited various assets amounting to Rs. 12.38 lakhs from his father. The assets in their turn also brought liabilities to the assessee worth Rs. 2.47 lakhs. The assessee father in order to meet the income-tax dues had in his lifetime borrowed certain amount from the Bank of India. The Bank of India granted overdraft facilities to the assessee's father. The borrowing from the Bank of India by assessee's father amounted to Rs. 2.47 lakhs. In order to secure the overdraft account, the assessee's father had pledged with the Bank of India various shares which he was owning at the relevant time. When the assessee inherited these properties from his father he had also to meet with the liability which had accrued due on the inherited assets. The assessee was, therefore, obliged to pay interest to the Bank of India on the overdraft which his father had taken from the Bank of India, The dividend income which the assessee derived from the shares was sought to be brought to tax. At that stage, the assessee contended that during the concerned assessment years he had also paid interest to the Bank of India on the overdraft account. These amounts of interest which he had paid to the Bank of India were required to be deducted on the gross receipts in order to compute the real income earned by the assessee during the assessment years for the purpose of income-tax his claim of the assessee has been turned down by the lower authorities. The short question which has been posed for our consideration is as to Whether the assessee is entitled to get a deduction of interest payment made by him to the Bank of India from the income from the assets inherited by him on the death of his father so far as the relevant assessment years are concerned.
14. It may be stated at the outset that the revenue had at no stage before the lower authorities taken up a contention that the respective amounts of interest, deductions of which the assessee had claimed for the concerned Assessm ent Years, had never been paid by him to the Bank of India. The only contention raised by the revenue was that the assessee was not entitled to get this deduction frog; the gross receipts. It is true that Mr. Raval for the revenue tried to raise a contention about the real possibility of such large amounts of interest having been paid by the assessee during the relevant assessm ent years to the bank of India. As the said contention was not urged before the lower authorities, and as, such a contention does not squarely fall within the scope of the only question of law referred for our opinion, we have not permitted Mr. Raval to raise that contention for the fist time before us. We shall, therefore, proceed on the basis that the assessee during the relevant assessm ent years had paid various amounts of interest to the Bank of India for discharging the liability accruing due to the Bank of India on account of the overdraft facilities which the Bank of India had extended to the assessee's father. It is also necessary to keep in view the further fact that all the concerned shares which the assessee had inherited from his father were pledged with the Bank of India by his father in his lifetime when he got the aforesaid overdraft facility from the Bank of India. Thus, these shares were charged with liability to make good the claim of the secured creditor, i.e., the Bank of India, so far as the overdraft account was concerned.
15. In the backdrop of the aforesaid well-established facts, we now proceed to consider the question raised before us for a decision.
16. So far as the first contention of Mr. Shah is concerned it postulates that the revenue is entitled to bring to tax only that part of the income of the assessee which can be taken to be his own income.
17. Mr. Shah's con--tention is that to the extent to which the assessee had to make a payment of interest to meet the liability arising out of the borrowings, of his decea--sed father, from a secured creditor like the Bank of India, the amount of interest which the assessee was required to pay during each of the assess--ment years represented a part of the revenue receipts which strictly did not form part of the assessee's own income. Assessee's real income of the relevant assessment years cannot include the amount of interest paid by the assessee to the secured creditor to meet the liability incurred by the deceased father. In short, the submission of Mr. Shah was that when he inheri--ted assets from his father he also inherited the liability attaching to his assets and while assessing the real income of the assessee, the liability, which the assessee had to discharge on account of the encumbered assets which he had inherited from his father, was required to be deducted in order to arrive at the correct figure of the real income earned by the asses--see during the relevant period. In order to support the aforesaid con--tention, Mr. Shah heavily relied uponthe recent decision of this Court in Usdayan Chinunbhai v. C. I. T. (1978 11 I T R 584 (Guj.)). In the aforesaid decision, this Court had to consider the question as to whether the as3essee who paid interest to unsecured creditors with a view to meet the debts incurred by the assessee's father was entitled to deduct the interest from the gross receipt of the assessee for arriving at the figure of real income earned for the purpose of being brought to tax under the I.-T. Act, 1961. This Court upheld the aforesaid contention of the assessee. In this connection, the following pertinent observations were made by this Court (headnote)
18. "Income taxable under the Income-tax Act is the real income of the assessee. In determining real income the question is not of any physical receipt of income but of the concept of the receipt in law. Ordinarily, when a partition takes place in a Hindu undivided family provision has to be made for the discharge of pre-Partition debts of the father. If, for some reason, provision for discharging the liabilities has been made or could not be made, the reasons who get the properties on partition keep the properties in their hands subject to the liability to satisfy the demands of the creditors. In this sense they can be said to hold the property for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors in terms of section 94 of the Indian Trusts Act, 1882."
19. On the facts before this Court in Udayan Chinubhai's case, it was found that certain properties which formed part of a Baronetcy Trust were tae subject of a partial partition between the father on the one hand and the mother and sons on the other. As the properties were comprised in a Baronetcy Trust they could not be touched in any respect. A consent decree was passed and an arbitrator was appointed. Under the terms of the consent decree and the arbitrator's award some of the debts of the family were allotted to the mother and sons. The concerned assessee had to pay interest to various unsecured creditors during the assessment years starting from 1951 and ending with 1961-62. The contention of the assessee was that these interest amounts paid by the assessee on the liability which had been allotted to them on partition should be allowed as a deduction in computing the total income of each of these four assessee, in that case. The income consisted of income from immovable property, business income and income from other sources.
20. Some of the debts which had been allotted by the arbitrator to Lady Tanumsti and her three sons were secured against immovable pro--perties and the I.-T. O. Allowed interest relating to these secured debts while computing the property income. The I.-T. O., however, did not allow the balance of the interest. Thus, the various amounts of interest paid to un--secured creditors by the assessee were disallowed by the I.-T. O. During each of the concerned assessment years. The question before this Court was whether the said view of the I.-T. O., as confirmed by the higher authorities, was sustainable, and whether the interest amounts paid by the assessee during the relevant assessm ent years to unsecured creditors were form--ing part of the real income of the assessee' mother and her sons, Udayan Chinubhai, Achyut Chinubhai and Kirtidev Chinubhai. Two contentions were raised by the assessee before this Court in Udayan Chinubhai case. The first contention was that these various interest amounts paid by the assessee to the unsecured creditors should be held to be allow--able as a permissible deduction under section 57(iii) of the I.- T. Act. Alternatively, it was submitted, while computing the real income of the concerned assessee during the relevant assessm ent years as not having formed a part and parcel of the real income of the assessee as they Represented various sums which diverted from the income of the assessee nor meeting, the claims of creditors having overriding title in that case. This Court negatived the first contention on behalf of the assessee and held that the provisions of section 57(iii) of the Act of 1961 equivalent to section 12(2) of the Act of 1922 could not apply to the facts of the case. But the alter--native contention on behalf of the assessee was upheld by this Court placing reliance on various judgments of the Privy Council and the Supreme Court starting from the decision in Raja Bejoy, Singh Dudhuria v. C. I. T. ((1933) 1 ITR135(PC)). This Court also placed reliance on the decision of the Supreme Court in C. I.-T. v. Sitaldas Strathdas ((1961)411TR367(SC)), In Sitaldas's. Case, it was laid down by the Supreme court as under (p. 374)
21. "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be said to be a part of the income of the assessee. Where, by the obli--gation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obliga--petition after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second."
22. This Court, also placed reliance on Chapter IX of the Indian Trusts Act, 1882, and held that ordinary a provision has to be made for the creditors to discharge the liabilities of the H. U. F. And for the pre- partition debts of the father at the time when a partition takes place, but, if for some reason or other, a provision for discharging the liabilities has not been made or could not be made, the persons who get the properties on partition keep the properties in their hands subject to the liability to satisfy the just demands of the creditors. In this sense, the sons and the mother, the assessee in that case, held the property for the benefit of the creditors and they were holding the assets which they received on partition for the benefit of the creditors to the extent necessary to satisfy the just demands of the creditors. It was, therefore, held that it was a case of an overriding right in favour of the creditors to have their liabilities paid from the assets which came to the bands of the assessee by virtue of the consent decree and the awards of the arbitrator in that case. It was further observed that it was by virtue of an overriding title in favour of the creditors that the total income which the assessee received did not represent "real income". By virtue of the over-- riding title in favour of the creditors, the income of the family had to be diverted to pay off the interest amounts on the outstanding liabilities and the case would fall within the principle in Bejo Singh Dudhuria's case rather than under the principle in P. C. Mullick---s case ((1938) 6I T R 206 (P C)). This Court adopted the phraseology employed by the Supreme Court in Sitaldas Tirath-- das' case and observed that it must be held that the amounts sought to be deducted in truth never reached the assessee as their income. By the very nature of the obligation which the assessee undertook under the scheme of the consent decree and the awards, the income, in the shape of interest payable on the outstanding liabilities of the H. U. F. Assigned to them, could never be said to be a part of their income. Because of the obligation on the assessee, the income was diverted before it reached them and, hence, the amount of interest was deductible in the case of the assessee before the Court. It would not be said to b: a disposition of income by the assessee. The property was received by the assessee subject to the liability for payment the demands of the creditors whose debts were assigned to them and though moneys were not actually borrowed for clearing the charge by discharging the liability, interest had to be paid to the creditors until the liabilities could be discharged and that interest must be held to be allowable expenditure. Placing reliance on the decision of the Privy Council in Bejoy Singh Dudhuria's case it was held that the concept is of "real income" and not any specific deduction covered by any of the provisions of the Income-tax Act, 1922, or any provision of the Income-tax Act, 1961. The only question is as to what is the "real income" which reaches the hands of the assessee. Is it a case of diversion of part of the total receipts by an overriding title before the income reached the assessee' hands or is it a diversion of a part of the income after it reached the hands of the assessee? This Court further observed that, as pointed out in Venugopala Varma Rajah's case ((1972) 84I T R 466 (SC)) the question is not of any physical receipt but what we have to consider is the legal concept of receipt in law and looked at in this sense, it must be held that the real income of the assessee consisted of only total receipts less the interest payable on the outstanding liabilities assigned to them under the terms of the consent decree and the award.
23. The aforesaid decision of this Court squarely answers the question raised for our consideration against the revenue and in favour of the assessee. It is pertinent to note that in Udayan Chinubhai's case this Court was concerned with the interest paid to unsecured creditors for discharging the liabilities which they had acquired from the father on partition from the original owner of the assessee. So far as the facts of the present case are concerned, they stand on a firmer footing inasmuch as the assessee had made payment of interest to a secured creditor like the Bank of India to discharge his legal obligation for meeting the liabilities which he had inherited from his father on his demise and the assets which the assessee inherited from his father included shares and buildings, and the shares were already pledged with the Bank of India by his father in his lifetime. These shares were of course pledged with the Bank of India by his father to meet the claim of the secured creditor, the Bank of India, arising out of the overdraft account. It is, therefore, claimed that as and when the assessee effected payment of interest in favour of the Bank of India to meet his outstanding liability which he had inherited from his father, he can be said to have diverted part of his gross revenue receipts to meet the liability arising in favour of the secured creditor on account of the overriding title. These receipts never came to the assessee as part and parcel of his real income. These amounts which were sought to be deducted by the assessee for the concerned assessm ent years never reached him as his income by the very nature of the obligation which the assessee had undertaken, to pay interest to the secured creditor. On account of the outstanding liability inherited from his father, the interest amounts paid by him to discharge this liability to the recurred creditors can never be said to be part and parcel of the assessee's income. These amounts represented revenue receipts which were diverted before they reached the assessee and they never culminated into any real income so far as the assessee was concerned. Thus, the facts of the present case are squarely covered by the ratio of the decision of this Court in Udayan Chmubhai's case. Not only 'that, but also they presented a stronger case for the assessee as compared to the one which was found in Udayan Chinubhai's case.
24. "When the Act by section 3 subjects to charge 'all income' of an indi--vidual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the Court by charging the appellant---s whole resources with a specific payment to his step--mother has to that extent diverted his income from him and has directed it to his step-mother ; to that extent what he receives for her is not his income."
25. Once we hold that the various amounts of interest which the assessee had paid to the secured creditor, namely, the Bank of India, were for meeting the claims of the secured creditor emanating out of the overriding in its favour, then, the logical conclusion which follows is that these amounts did not form part of the real income of the assessee at all and they were required to be deducted before the chargeable income of the assessee could be computed for the relevant assessment years. In that view of the matter, it is not strictly necessary for us to examine the alternative submission of Mr. Shah when he contended that even assuming that these various amounts of interest paid by the assessee to the Bank of India did form part and parcel of the assessee's real income, they were liable to be deducted as permissible deductions under section 57(iii) of the Act of 1961. Mr. Shah in that connection wanted to rely upon the decision of the Supreme Court in Seth R.
26. Dalmia v. C. I. T. ((1977) 110 I T R 644). He also placed strong reliance on the decision of this Court in C. I. T. v. Mrs. Indumati Ratanlal.( (1968) 70 I T R 353). And specially on the observation in the aforesaid decision at p 365, where it was observed that it is now well settled by the decisions of the Bombay High Court in C. I. T. v. Sir Purshottamdas Thakurdas ((1946) 14 I T R 305) and Ormerodt (India) P. Ltd. v. C. I. T. ((1959) 36 I T R 329) that the expenditure incurred for the purpose of maintaining the sources of income earned was liable to deduction while computing the real income. Mr. Shah urged that the interest amounts were paid by the assessee during the relevant assessm ent years to the Bank of India with a view to see that the pledged shares did not get disposed of by the banker. If the assessee had not paid the interest amounts, the bank would have disposed of these pledged shares. Mr. Shah, therefore, contended that these interest amounts squarely fall within the provisions of section 57(iii) of the Income-tax Act. As we have held that the interest amounts did not represent part of the real income of the assessee during the relevant assessm ent years and as we have upheld, the first contention, we do not deem it necessary to express any opinion on the second alternative submission of Mr. Shah as to whether these amounts were permissible deductions under section 57(iii) of the Income-tax Act, though we feel that prima facie there is lot of substance in what Mr. Shah urged in support of the second submission. We do not, therefore, dilate on it any further.
27. As a result of the aforesaid discussion, our answer to the question refer--red to us is in the negative, i.e. In favour of the assessee and against the revenue. The Commissioner shall pay the costs of this reference to the assessee.